A Mountain of Debt

When Paul Kennedy published his classic work, “The Rise and Fall of the Great Powers”, the year was 1987. In October of that year, stock markets across the world had crashed. Not since 1929 had anyone seen the likes of those dark autumn days. Kennedy’s book was a thorough examination of the relationship between empire and debt in the affairs of nations. Ranging from the year 1500 to roughly its date of publication, the book covered nearly five hundred years of economic history. Kennedy’s thesis was straightforward. He maintained that to achieve the status of a great power, nations inevitably were prone to an end-result characterized as imperial overreach. The main symptom of this classic disease was debt. Massive debts accrued through an ongoing policy labeled as “guns and butter”.
Kennedy was most certainly responding to the economic crisis that lasted from the late 1960’s and essentially brought down four American administrations before it finally ended in the late 1980’s. This period was known as “the great stagflation”. Inflation soared as job growth wavered. Recession and price increases had become the new norm. A policy of “guns and butter” had enveloped Washington. The sound money policies of a fiscally prudent Republican Party had been overthrown by the Keynesian deficits of low taxes, high welfare-state expenditures and military adventures (Vietnam and others) across the globe. The ensuing balance-of-payments red ink played havoc with the vaunted US dollar. Finally, in 1971, President Nixon closed the gold window and global currencies were allowed to free-float. Inflation soared. In hindsight, Presidents Johnson, Nixon, Ford and Carter were all viewed as unsuccessful economic managers in this “guns and butter” era.
In order to defeat “the great stagflation” two major events took place. First, record-high interest rates were established to weaken business activity. These monetary actions by the Federal Reserve (the US central bank) caused the deepest recession since the 1930’s. Inflation was wrung out of the system at the high cost of deep unemployment. However, when the Federal Reserve began to loosen policy again, investors feared the reintroduction of inflation. In anticipation of the return to higher interest rates in late 1987, the stock market collapsed. The “Panic of 87” brought with it a new policy response. The second major effort to cure the stagflation was called “outsourcing” the industrial base. In other words, break the back of American labor by making it compete with the penury wages of ex-peasants from Third World Asian countries.
From 1987 onward, it was the policy of outsourcing that has kept inflation at bay. Industrial goods, once made in the US, were now made throughout the world and shipped to the US. These goods were inexpensive and plentiful. However, in order to keep the US economy functioning, a major shift among sectors had to take place. This shift was from production to finance. Instead of basing its wealth and power on the sale of domestically-made products, the US sold instruments of debt on a massive scale. Because it didn’t have to worry about inflation, the Federal Reserve under both Alan Greenspan and Ben Bernanke have kept interest rates at record low levels. This became a speculator’s dream scenario. Workers, savers, pensioners and small business operators were bludgeoned as financial bubbles multiplied. From the leveraged buy-out bubble, to the 90’s dot-com bubble, to the housing bubble, to the colossal bubble on US treasuries (domestic budget debt), the non-producing class has feasted in this financial environment. As interest rates have remained super-low, leveraged speculation (debt) has sky-rocketed.
Today, the US is the world’s largest debtor nation. Its level of social and economic inequality is unprecedented. Its real unemployment statistics are double-digit. The US national debt is over 17 trillion dollars. Its annual growth rate over the past six years is less than 2%. Yet, interest rates have remained at zero for those same six years. The financial speculators still feast on leveraged gambits. In the meantime, workers live from paycheck to paycheck, or worse. Not surprisingly, the US political system has become paralyzed over economic policy direction.
The only bandage that keeps this “Great Power” functioning is its reputation for paying off on its national debt. It can accomplish this goal by even more borrowing. Without major foreign creditors like China, Japan and Saudi Arabia, the US would fold like a “house of cards” and the world economy with it. Paul Kennedy’s day of reckoning has been like a can kicked down the road for nearly three decades. While the system is being held together by its shaky global economic linkages, America’s tradition of non-partisan political cooperation is unraveling. Economic policy is being bitterly argued, as Democrats favor widening domestic debt and Republicans the opposite. Both political parties are splitting over foreign entanglements and the size of the US military. Isolationism, long dormant since the 1930’s, has reared its head. Far-left liberals and libertarian conservatives have now converged on the issue of “empire”. It is my firm belief that in the next presidential election, isolationism will become the major foreign policy issue.
The stagflation crisis of the 70’s has been transformed into the growth crisis of the early 21st century. Like the 1930’s, far-right Nazi mania has re-emerged in Europe. Far-left demonization of Israel shares the same anti-Semitic root. The economic crisis amplifies this phenomenon ten-fold. Jews around the world read the echo of this manifestation on the internet daily. The solution to the crisis will be long-lived. At present there are only simple, ideologically-based answers. Perhaps there is no solution to a permanent growth model. Ecologists argue that like all of physical reality, there are limits to growth. Only cancerous cells grow without limit, they say.
The global position of the US is definitely weakening. Its new “financial economy” has already crashed once. No one can forget President Bush’s famous plea that, without a trillion dollar infusion, “this sucka is going down”! In the same vein, Treasury Secretary Hank Paulson begged on his knees for Democratic congressional leaders to pass the TARP. The financial system is still very fragile, as the Federal Reserve pumps 80 billion dollars a month into newly printed notes. The central bank buys the government’s spiraling debt in order to keep interest rates artificially low. They’ve been doing this for years. Still the economy sputters. Even if the economy could get going again, the new inflation level would surely become astronomical, as monetary velocity heated up all that new money. If economists weren’t pushing on a string in a vain attempt at growth, they’d be popping balloons of inflated dollars to slow the monster down.
Take heed, Israel, your friend and strategic partner is in deep trouble! Couldn’t a flood of new oil on the world’s markets lower costs? Desperate times require desperate solutions. Iran and America are talking. Is it any wonder that Prince Bandar was in Moscow? The times, they are a changing. In these changing times, who is Israel talking to, and what is Israel’s new strategy?

About the Author
Steven Horowitz has been a farmer, journalist and teacher spanning the last 45 years. He resides in Milwaukee, Wisconsin, USA. During the 1970's, he lived on kibbutz in Israel, where he worked as a shepherd and construction worker. In 1985, he was the winner of the Christian Science Monitor's Peace 2010 international essay contest. He was a contributing author to the book "How Peace came to the World" (MIT Press).